Judgment:
Pinaki Chandra Ghose
1. The instant appeal under Section 260A of the IT Act, 1961 (hereinafter referred to as 'the Act') for the asst. yr. 1989-90 was admitted for hearing on the following questions of law:
(1) Whether disallowance under Section 143(1)(a) of the IT Act, 1961 can be made merely because proof in support of a claim made in the return is not annexed to the return?
(2) Whether the Tribunal was justified in holding that the disallowance made by the AO falls within the purview of prima facie adjustment within the meaning of Section 143(1)(a) and its purported finding in this behalf are arbitrary, unreasonable and perverse?
2. The facts of the case briefly are as follows:
(a) The assessee filed its returns for the asst. yr. 1989-90 along with the tax audit report under Section 44AB of the Act. In the computation of income, the assessee claimed deduction of Rs. 21,12,766 under Section 80G, being 50 per cent of the donation amount of Rs. 42,25,533. Serial No.7 of the tax audit report filed with the return reads as follows:
7. Any tax, duty or other sum
(i) Debited to the P&L; a/c but not paid during the previous year
Rs. 1,66,20,857=02
(ii) Paid during the previous year but allowed as a deduction in any earlier year Section 43B
Rs. 1,22,21,679=88
(b) In respect of the said return, an intimation under Section 143(1)(a) of the Act was issued by the AO on 6th Aug., 1990. In the said intimation, the AO made, inter alia, the following adjustments:
(i) Disallowance under Section 43B as per tax audit report Rs. 1,66,20,887
(ii) Donation debited to P&L; a/c disallowed for want of any receipt and also for want any valid certificate for tax exemption certificate filed
Rs. 42,25,532
As a result of the aforesaid adjustments, the assessee was made liable for payment of additional tax over and above the normal tax
3. At the material time, the Act did not provide for any appeal against the intimation under Section 143(1){a) of the Act. On 15th March, 1991 the assessee made an application under Section 154 of the Act objecting the said adjustments. The assessee furnished, inter alia, break-up of the sum of Rs. 1,66,20,857 mentioned in the tax audit report comprising commission to directors (Rs. 1,26,773) and bonus (Rs. 1,50,00,000) both falling under Clause (c) of Section 43B and PF contribution (Rs. 14,94,084) falling under Clause (b) of Section 43B and submitted evidence in support of its claim for allowability of the said amounts
4. The AO by an order dt. 28th Feb., 1992 under Section 143(1)(a)/154, out of Rs. 1,66,20,857 allowed a sum of Rs. 1,51,47,884 comprising commission to directors (Rs. 1,26,773), bonus (Rs. 1,35,48,969) and PF contribution (Rs. 14,72,142). The disallowance under Section 43B was retained to the extent of Rs. 14,72,973 comprising bonus (Rs. 14,51,031) and PF contribution (Rs. 21,942). The AO also allowed a portion of the assessee's claim for deduction under Section 80G
5. The assessee preferred an appeal against the said order dt. 28th Feb., 1992 questioning, inter alia, the jurisdiction of the AO to make the adjustments in the intimation dt. 6th Aug., 1990. On 20th March, 1992 the assessee made another application under Section 154 in respect of which the AO passed an order on the same day partly increasing the deduction allowed under Section 80G
6. The assessee, thereafter, preferred another appeal against another order dt. 20th March, 1992 again raising, inter alia, the question of jurisdiction of the AO to make the adjustments in the intimation dt. 6th Aug., 1990. A third rectification order under Section 154 was passed by the AO on 20th July, 1992 against which the assessee also preferred an appeal before the CIT(A)
7. All the said three appeals were decided by the CIT(A) by a consolidated order dt. 28th Dec, 1994. The CIT(A) held that no adjustment under Section 143(1)(a) could be made either with reference to Section 43B or Section 80G because of non-submission of evidence with the return. It was also held that the tax audit report did not state that the sum of Rs. 1,66,20,857 was inadmissible under Section 43B. The CIT(A) thus, allowed the assessee's appeals on the said two issues
8. Against the said order of the CIT(A), the Revenue officer preferred an appeal before the Tribunal objecting to the deletion of adjustment of Rs. 14,72,973 under Section 43B as also the adjustment with reference to Section 80G. The Tribunal accepted the assessee's contention that no prima facie adjustment could be made under Section 143(1)(a) on the ground that proof in support of a claim was not submitted with the return. The Tribunal, thus, deleted the adjustment made with reference to Section 80G. However, the Tribunal upheld the adjustment made under Section 43B on the ground that it was based on the observation made by the tax auditor in the tax audit report
9. Mr. J.P. Khaitan, learned advocate, appearing on behalf of the appellant, submitted that Section 143 as in force at the material time provided for issue of an intimation under Sub-section (1) without any notice or hearing to the assessee. He further submitted that Sub-section (2) provided for issue of notice and Sub-section (3) provided for assessment after such notice and hearing. The proviso to Sub-section (1) empowered the AO to make in the intimation, inter alia, the following adjustment in the income or loss declared in the return is follows:
(iii) Any loss carried forward, deduction, allowance or relief claimed in the return, which, on the basis of the information available in such return, accounts or documents, is prima facie inadmissible, shall be disallowed.
10. He further submitted that the scope of the power of the AO to make prima facie adjustment in terms of the proviso to Section 143(1)(a) has been considered by this Hon'ble Court and also by other High Courts in several cases. The said power to make prima facie adjustment has been equated with the power under Section 154 to rectify a mistake apparent from the record not involving any doubt, debate or factual investigation/enquiry. It has been held that no prima facie adjustment can be made merely because evidence in support of a claim made in the return was not enclosed with the return or where an enquiry on facts was necessary
11. He also contended that in Circular No. 581, dt. 28th Sept., 1990 [(1990) 186 1TR (St) 2] issued by the CBDT, the scope of the power to make prima facie adjustment under Section 143(1)(a) was somewhat coterminous with the power to rectify a mistake apparent from the record under Section 154. In the case of Khatau Junkar Ltd. and Anr. v. K.S. Pathania Dy. CIT and Anr. : (1992) 102 CTR (Bom) 194 : (1992) 196 ITR 55 (Bom), it was held by the Hon'ble Bombay High Court that prima facie adjustment could be made only where on the face of the return and the documents and accounts accompanying it, the deduction claimed was inadmissible. If any further enquiry was necessary or if the ITO felt that further proof was required in connection with the claim for deduction, he would have to issue a notice under Section 143(2) of the Act
12. In the case of SRF Charitable Trust v. Union of India and Ors. : (1991) 100 CTR (Del) 160 : (1992) 193 ITR 95 (Del), the Hon'ble Delhi High Court at pp. 98-99 of the reports held as follows:.The conclusion that the claim of the assessee is inadmissible must, in other words, flow from the return as filed. No power is given to the ITO to disallow a claim for the reason that there is no proof in support of the claim made by the assessee. In a way, the said Clause (iii) of the proviso is analogous to Section 154 of the Act. Where it is evident from the return as filed, along with the documents in support thereof, that a claim of the assessee is inadmissible, only then an adjustment under the said proviso can be made. If proof in support of the claim is not furnished by an assessee, then for the lack of proof, no disallowance or an adjustment can be made. The only option which is open to the ITO, in such a case, is that he can require the assessee to furnish proof in which case he will presumably have to issue notice under Section 143(2)....
13. The said circular and decisions of the Hon'ble Bombay High Court and Delhi High Court were considered by a learned Single Judge of this Hon'ble Court in Modern Fibotex India Ltd. and Anr. v. Dy. CIT and Ors. : (1995) 126 CTR (Cal) 69 : (1995) 212 ITR 496 (Cal). At pp. 507-508 of the reports, the learned Single Judge agreed with the view taken by the Hon'ble Bombay High Court and Delhi High Court. At p. 509 of the reports, it was held as follows:
The exercise of power under Section 143(1)(a) is, therefore, required to be scrutinized carefully and kept strictly within the bounds of the statute, any dispute being resolved in favour of the assessee.
14.He also submitted that appeal against the said judgment of the learned Single Judge in APO No. 383 of 1995 in Modern Fibotex India Ltd. was dismissed by the Division Bench of this Hon'ble Court on 23rd Nov., 2000
15. Section 43B of the Act in its opening part provides for deduction of, inter alia, any PF contribution falling under Clause (b) and bonus falling under Clause (c) only in the year of actual payment. However, by reason of the first proviso, deduction is also allowed in respect of bonus falling under Clause (c) paid after the close of the previous year, that is, in the next accounting year, but on or before the due date for filing the IT return in respect of the previous year, evidence of such payment having been furnished along with the return. Allied Motors (P) Ltd. v. CIT : (1997) 139 CTR (SC) 364 : (1997) 224 ITR 677 (SC). The second proviso applicable in respect of PF contribution falling under Clause (b) provides for deduction only if payment has actually been made on or before the due date as per the PF law. Before making any disallowance under Section 43B, the AO is required to examine the applicability of the two provisos to the amounts in question. A disallowance under Section 43B cannot be made simply because payment was not made within the previous year itself
16. He further submitted that against serial No. 7(i) of the tax audit report, the amount debited to the P&L; a/c but not paid during the previous year was required to be specified. The said serial No. 7(f) did not require the tax auditor to specify the amount which was inadmissible under Section 43B. There was no requirement to furnish any break-up of the respective amounts with reference to the different clauses of Section 43B or to state as to whether the same or any part thereof had been paid before the due date for filing the IT return or as to whether the amount specified included any PF contribution and if so, whether such contribution had been actually paid on or before the due date prescribed under the PF law. Without such break-up, information and evidence it was impossible to determine the allow ability or disallow ability under Section 43B of the Act specified by the tax auditor
17. It was further submitted that in the instant case, the information contained in the tax audit report against serial No. 7(i) did not enable the AO to make any prima jacie adjustment under Section 143(1)(a) with reference to the provisions of Section 43B. As required by the prescribed form of the tax audit report, the tax auditor merely specified the amount debited to the P&L; a/c but not paid within the previous year. The aggregate amount mentioned in the tax audit report was made up of three amounts two of which (bonus and commission) were covered by Clause (c) of Section 43B in respect of which the first proviso was relevant and the PF contribution was covered by Clause (b) in respect of which the second proviso was relevant. The tax audit report did not contain any break-up of the amount or the further information required in the light of the two provisos to Section 43B. The tax auditor did not specify in the tax audit report the amount inadmissible under Section 43B. The AO had to make further enquiry and examine further facts and documents by calling for break-up of the amount specified in the tax audit with reference to the different clauses of Section 43B and further details, information and documents with reference to the two provisos for the purpose of deciding whether any disallowance could be made under Section 43B. The AO was, therefore, required to issue a notice under Section 143(2) for the purpose of making an assessment under Section 143(3). The instant case does not fall within the purview of the proviso to Section 143(1)(a) at all. The AO could not have disallowed the amount specified in the tax audit report under Section 43B or made any prima facie adjustment under the proviso to Section 143(1)(a)
18. He relied on Jagatdal Jute & Industries Ltd. v. CIT and Anr. : (2004) 188 CTR (Cal) 593 : (2004) 266 ITR 587 (Cal). In this case the Hon'ble Court considered the question as to whether the power under Section 154 to rectify a mistake apparent from the record could be exercised to make a disallowance under Section 43B on the basis of the information contained in the tax audit report. At pp. 593-594 of the reports, it was held by this Hon'ble Court that for making a disallowance under Section 43B, further enquiry was necessary and the power under Section 154 could not be exercised merely on the basis of the information contained in the tax audit report without holding such enquiry. The principle laid down by this Hon'ble Court in Jagatdal Jute's case (supra) with reference to the power of rectification under Section 154 is equally applicable for deciding the scope of the power to make prima facie adjustment under Section 143(1)(a). The power under Section 143(1)(a) to make a prima facie adjustment has been equated with the power to rectify a mistake apparent from the record under Section 154, which cannot be done under Section 154 and Section 143(1)(a) of the Act
19. He further relied on the decision in the case of G.K.W. Ltd. v. CIT : (2005) 197 CTR (Cal) 98 : (2005) 273 ITR 380 (Cal). It was held by this Court that when the AO proposed to differ with the disclosure made in the return, an opportunity of hearing to the assessee was required by service of notice under Section 143(2) and the matter could be gone into under Section 143(3) and not as a prima facie adjustment under Section 143(1)(a) of the Act
20. He contended that no doubt the first proviso to Section 43B required the. evidence of payment to be furnished along with the return. However, as submitted hereinbefore, no prima facie adjustment could be made simply because of want of such evidence with the return. In this context he relied on the decision in the case of CIT v. Berger Paints (India) Ltd. : (2002) 174 CTR (Cal) 269 : (2002) 254 ITR 503 (Cal). In that case, the Court in considering the effect of the provisions of Sub-section (5) of Section 32A and Sub-section (4) of Section 80HHC which required reports of the accountant to be furnished along with the return of income. It was held that the said requirement was directory and not mandatory and the report could be submitted even subsequent to filing of the return. In fact, in the instant case, the AO himself considered the requirement of furnishing the evidence of payment with the return as directory. No evidence as regards payment was furnished by the assessee with the return. However, the AO accepted such evidence subsequently furnished by the assessee by way of rectification application and on the basis thereof deleted the disallowance to the extent of Rs. 1,51,47,884 out of Rs. 1,66,20,857. If the AO had considered the requirement of furnishing the evidence of payment with the return as mandatory, he would not have accepted such evidence subsequently furnished by the assessee in rectification proceedings
21. He also contended that, it is pertinent to mention here that the prescribed form of the tax audit report was substituted much later on 4th June, 1999. In the substituted form against serial No. 21, full details were required to be mentioned with reference to each of the clauses of Section 43B. The information required to be furnished also covered the requirements of the two provisos. It was only after the prescribed form of the tax audit report which was substituted w.e.f. 4th June, 1999 that the information contained in the report itself became sufficient for the AO to decide on the allow ability or disallow ability of a particular amount under Section 43B. However, the instant case relates to the asst. yr. 1989-90 when the prescribed form of the tax audit report did not require specification of the requisite details which could have enabled the AO to make a prima facie adjustment under the proviso to Section 143(1)(a) of the Act
22. On the contrary, Mr. M.P. Agarwal, learned advocate, appearing on behalf of the Revenue relied on the decision in the case of CIT v. Sitaram Textiles Ltd. : (2000) 164 CTR (Ker) 252 : (2001) 248 ITR 139 (Ker). In the said case the Court was concerned with Clause (d) of Section 43B which also finds mention in the first proviso. The facts in that case are clearly distinguishable. There the amount specified in the tax audit report only represented interest falling within Clause (d) of Section 43B, unlike the instant case where the amount was a composite one calling for an enquiry as regards its break-up with reference to the different clauses of Section 43B. Further, in that case the first proviso was not cited before nor considered by the Court. As such, it was held by the Court that mere statement in the tax audit report that the amount was not paid during the previous year, was sufficient to make the disallowance. The decision in Jagatdal Jute's case (supra) was rendered after taking into consideration the effect of the provisos and it was held that no disallowance could be made under Section 43B merely on the basis of statement as regards non-payment made in the tax audit report without making further enquiry. It was submitted that this Court should be pleased to follow the view already taken in Jagatdal Jute's case (supra)
23. He also relied on the decision in the case of Gopi Krishna Granites India Ltd. v. Dy. CIT : (2001) 170 CTR (AP) 603 : (2001) 251 ITR 337 (AP). The said case was also distinguishable on facts. In that case also, the amount specified in the tax audit report only represented interest falling within Clause (d) of Section 43B and no enquiry as regards its break-up with reference to the different clauses of Section 43B was necessary. Further, in that case it was held that it was the admitted position that the liability for the interest amount was not incurred and had not accrued during the relevant previous year and that such interest was payable in the next year. As such, the Court held that the disallowance could be made. There are no such admitted facts in the instant case. The said decision was rendered on its own facts and does not provide any assistance in deciding the question arising before this Court
24. He further drew our attention in the case of Shree Digvijay Cement Co. Ltd. v. CIT : (2006) 206 CTR (Guj) 1 : (2007) 289 ITR 250 (Guj). In that case, the Supreme Court relying on the decision in the case of Mahalakshmi Sugar Mills Co. v. CIT : (1980) 16 CTR (SC) 198 : (1980) 123 ITR 429 (SC) held that interest on the outstanding sales-tax formed part of the sales-tax and could be made subject-matter of prima facie adjustment under Section 143(1)(a). It was submitted that the view of this Court on the issue is different from that of the Gujarat High Court
25. After considering the facts and circumstances of this case and the decisions cited at the Bar, it appears to us that the Tribunal upheld the adjustment made under Section 43B on the ground that it was based on the observation made by the tax auditor in the tax audit report. It further appears from the fact that the assessee filed its returns for the asst. yr. 1989-90 along with the tax audit report under Section 44AB of the Act, In respect of the said return, an intimation under Section 143(1)(a) of the Act was issued by the AO and the AO made the following adjustments:
(a) Disallowance under Section 43B as per tax audit report Rs. 1,66,20,887
(b) Donation debited to P&L; a/c disallowed for want of any receipt and also for want of any valid certificate for tax exemption certificate filed Rs. 42,25,532
26. As a result of the aforesaid adjustments, the assessee was made liable for payment of additional tax over and above the normal tax. The assessee filed an application under Section 154 of the Act objecting to the said adjustments. The assessee also furnished break-up of the sum i.e., Rs. 1,26,773 for commission to the directors and bonus Rs. 1,50,00,000, both fall under Clause (c) of Section 43B and PF contribution (Rs. 14,94,084) falling under Clause (b) of Section 43B and our attention was also drawn to the evidence in support of such claims which is annexed to the paper book. It further appears that the AO by an order dt. 28th Feb., 1992 under Section 143(1)(a)/154, out of the said sum of Rs. 1,66,20,857 allowed a sum of Rs. 1,51,47,884 and the PF contributions (i.e., Rs. 14,72,142). The disallowance under Section 43B was retained to the extent of Rs. 14,72,973 (i.e., bonus Rs. 14,51,031 and PF contribution Rs. 21,942). It further appears that a portion of the assessee's claim for deduction under Section 80G was also allowed. It also appears to us that three appeals were preferred by the appellant/assessee which were decided by the CIT(A) dt. 28th Dec, 1994. The CIT allowed the assessee's appeals and the Revenue preferred an appeal before the Tribunal objecting to the deletion of adjustment of Rs. 14,72,973 under Section 43B. The Tribunal held in favour of the assessee that no prima Jacie adjustment could be made under Section 143(1)(a) on the ground that proof in support of a claim was not submitted with the return. Thus, the Tribunal upheld the adjustment made under Section 43B on the ground that it was based on the observation made by the tax auditor in the tax audit report
27. After considering the decisions cited at the Bar, we agree with the views taken by the Bombay and Delhi High Court as well as by our High Court and we also hold that the exercise of power under Section 143(1)(a) is required to be scrutinized carefully and should be kept strictly within the four corners of the statute, any dispute being resolved in favour of the assessee. See : (1992) 102 CTR (Bom) 194 : (1992) 196 ITR 55 (Bom)(supra), : (1991) 100 CTR (Del) 160 : (1992) 193 ITR 95 (Del)(supra) and : (1995) 126 CTR (Cal) 69 : (1995) 212 ITR 496 (Cal)(supra)
28. We have also considered Section 43B and we accept the contention of Mr. Khaitan appearing for the assessee and hold that Section 43B provides for deduction of any PF contribution falling under Clause (b) and bonus falling under Clause (c) only in the year of actual payment. However, by reasons of the first proviso, deduction is also allowed in respect of bonus falling under Clause (c) paid after the close of the previous year, that is, in the next accounting year but on or before the due date for filing the IT return in respect of the previous year. In the instant case, evidence of such payment has been furnished along with the IT return. The second proviso applicable in respect of PF contribution falling under Clause (b) provides for deduction only if payment has actually been made as per the PF law. See : (1997) 139 CTR (SC) 364 : (1997) 224 ITR 677 (SC)(supra)
29.It is also necessary for the AO to examine second proviso before making any disallowance. A disallowance cannot be made under Section 43B simply because payment was not made within the previous year. From the facts it appears that the information contained in the tax audit report did not enable the AO to make any prima Jacie adjustments under Section 143(1)(a) with reference to the provisions of Section 43B. It further appears that the tax audit report did not contain any break-up of the amount or the further information required in the light of the two provisos to Section 43B. The tax auditor did not specify in the tax audit report the amount inadmissible under Section 43B. Therefore, it appears to us that it was necessary for the AO to issue a notice under Section 143(2) for the purpose of making an proper assessment under Section 143(3)
30. In the case of Jagatdal Jute & Industries Ltd. (supra), it has already been decided that for making a disallowance under Section 43B, further enquiry was necessary and the power under Section 154 could not be exercised merely on the basis of the information contained in the tax audit report without holding such enquiry. It was also necessary for the AO to give an opportunity of hearing to the assessee by service of notice under Section 143(2) and the matter could be gone into under Section 143(3) and not by way of prima facie adjustment under Section 143(1)(a). [See G.K.W. Ltd. v. CIT (supra)]
31. It further appears to us that the decision of the Kerala High Court in CIT v. Sitaram Textiles Ltd. (supra) is distinguishable in the facts and circumstances of this case. After considering the effect of the provisos held under Section 43B merely on the basis of statement as regards nonpayment made in the tax audit report ought not to have been done without making further enquiry
32. We have considered the decisions of this High Court in the cases of (1) Hindustan Motors Ltd. v. CIT : (1996) 132 CTR (Cal) 472 : (1996) 218 ITR 450 (Cal), (2) CIT v. Padmavati Raje Cotton Mills Ltd. : (1999) 155 CTR (Cal) 540 : (1999) 239 ITR 355 (Cal) and (3) CIT v. Orient Beverages Ltd. : (2000) 164 CTR (Cal) 529 : (2001) 247 ITR 230 (Cal) and, in our opinion, the decisions cited on behalf of the Revenue, cannot be a help to them in the facts and circumstances of this case
33. In the case of Allied Motors (P) Ltd. (supra), the Supreme Court held that:
While interpreting Section 43B without the first proviso, some of the High Courts, in order to prevent undue hardship to the assessee, had taken the view that Section 43B would not be attracted unless the sum payable by the assessee by way of tax, duty, cess or fee was payable in the same accounting year. If the tax was payable in the next accounting year, Section 43B would not be attracted. This was done in order to prevent any undue hardship to assessees such as the ones before us. The memorandum of reasons takes note of the combined effect of Section 43B and the first proviso inserted by the Finance Act, 1987. After referring to the fact that the first proviso now removes the hardship caused to such taxpayers, it explains the insertion of Expln. 2 as being for the purpose of removing any ambiguity about the term 'any sum payable' under Clause (a) of Section 43B. This Explanation is made retrospective. The memorandum seems to proceed on the basis that Section 43B read with the proviso takes care of the hardship situation and hence Expln. 2 can be inserted with retrospective effect to make clear the ambit of Section 43B(a). Therefore, Section 43(a), the first proviso to Section 43B and Expln. 2 have to be read together as giving effect to the true intention of Section 43B. If Expln. 2 is retrospective, the first proviso will have to be so construed. Read in this light also, the proviso has to be read into Section 43B from its inception along with Expln. 2.
The Court further held that:
The Departmental understanding also appears to be that Section 43B, the proviso and Expln. 2 have to be read together as expressing the true intention of Section 43B. Explanation 2 has been expressly made retrospective. The first proviso, however, cannot be isolated from Expln. 2 and the main body of Section 43B. Without the first proviso, Expln. 2 would not obviate the hardship or the unintended consequences of Section 43B. The proviso supplies an obvious omission. But for this proviso the ambit of Section 43B becomes unduly wide bringing within its scope those payments, which were not intended to be prohibited from the category of permissible deductions.
34. Accordingly, following the decisions of our High Court and the Supreme Court, we hold in favour of the assessee and answer both the questions in the negative
35. For the reasons stated hereinabove the appeal is allowed